Venture Capital Investing
Venture capital is a subset of private equity. Venture Capital is the early stage form of private equity where investors focus on investing in startup (highly risky) ventures. Private equity refers to the holding of stock in unlisted private companies — private companies that are not quoted on a stock exchange. The funds raised through private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a private company’s balance sheet. Venture Capitalists invest in high-risk, high-return investments, with an investment horizon of six or seven years. The venture capitalist’s final goal is to either take the private company public (Initial Public Offering) or Trade sale. Venture capital manages risk typically with staged investments in which the private company has to meet certain milestones before qualifying for additional rounds of financing.
For companies, the consequences of taking venture capital is long-lasting. The decision is both a financial and a strategic one. Some of the advantages of venture capital hinges on the experience and connection of the investors:
Venture capital provides long term equity financing which while creating a solid capital base for future business expansion. It also brings in a host of value added services.
Venture capitalists provide private companies with ongoing strategic, operational and financial advice.
Having venture capitalists as investors may provide confidence to stakeholders and customers.
Investments from venture capitalists also ensure proper corporate governance from the initial stage.
The venture capitalist offer strong business expertise in their area of business which ultimately helps the business to perform well against the market competition.
The venture capitalist comes with network of contacts that can add value to the private company, such as in recruiting key personnel, providing readymade international markets, introductions to strategic partners, and if needed co-investments from other venture capital firms when additional rounds of financing are required.
The venture capitalist can also provide additional rounds of funding should it be required to finance growth.
Venture capitalists are experienced in the process of preparing a private company for an initial public offering.
The drawbacks of venture capital financing is the potential forgo of control. It could severely hurt the company if interests and visions are not aligned.
Private companies that raise venture capital may be required to give up a controlling stake in the private company.
Venture capitalists tend to influence the strategic direction of the private company.
Venture capitalists are generally interested in taking control of the private company if the management is unable to drive the business.